Life 3 is learned through Phoenix. I don't remember where to get it, and I'm too lazy to look it up. I'm sure someone will explain that part. At least one person needs to know Life 3 before the battle starts. In order to win the battle, at least one person has to have Life 3 cast on him, and it would be best to have it cast on everyone lest you end up the same way you just ended up. Seems your strategy works, you just need Life 3.

Phoenix.

Also, maybe the reason you don't have Ragnorok is that you had him refined into a sword. There's a point in the game where you find a rock. You have the option to keep the rock or refine it into a sword. The sword is allegedly the most powerful in the game, but if you elect not to have it forged, you find out the rock is the Magicite Ragnorok, which isn't really a good summon, but he teaches you the best magic in the game, Ulitma. That being said, you need to find Phoenix and get Life 3.